Are premium bonds really “premium”?

Premium Bonds for Investors

Investing in premium bonds is a win-win for both parties involved. For the government, the cost associated with these bonds is much lower when compared to regular bonds. It is also a great investment for buyers as they can end up receiving a high rate of return, which they might not otherwise earn from investing in any other asset.
Although out of 999,999 bonds being offered in series, only 1, 3 and 660 prizes are offered for first, second and third winnings respectively. The probability of securing first, second and third prize is 0.000001, 0.000003 and 0.00066 respectively. But there’s no harm in trying your luck; who knows it might just be your lucky day? Apart from that, even if you don’t win anything, you will still get 3% interest rate on your premium bond, which is a reasonable return on an investment of this stature.

Premium Bonds for the Government

Premium bonds are actually more beneficial for the government when compared to regular bonds. It must be hard to control yourself considering the hefty returns that are associated with these bonds. Have a look at the following calculation:

Premium Bond Info
Premium Bond Denomination: 40,000
No. of bonds in the series: 999,999
No. of series: 1

Description Formula Estimate Result
Total Financing for government Denomination x no. of bonds in the series 40,000 x 999,999 39,999,960,000
Complete Financing in Billion No. of series x Total financing for government 1 x 39,999,960,000 40 Billion
Adding Interest Rate Total return rate + Interest rate 5.00% + 3.00% 8.00%
Calculation of Prizes Prize Amount    
Total Expense on finances (Prize Expense) [Prize Amount x No. of Prize] + [Prize Amount x No. of Prize] + [Prize Amount X No. of Prize]/ Times in a year [80,000,000 x 1] + [30,000,000 x 3] + [500,000 x 660]/ 4 2,000,000,000
Calculating Government’s Total % Expense on Premium Bonds Expense of Financing/Total Financing 2,000,000,000/ 39,999,960,000 5.00%

 

The total cost of the premium bonds for the government is 8.00%, which is still less than that of regular bonds of 10%. Thus, this calculation clearly shows how beneficial premium bonds are for the government, since it allows for cheaper borrowing.  To conclude, premium bonds can benefit all parties involved by offering significant returns to the investors in the form of prizes, a nominal annual return and a low form of borrowing to the government.